1.    INTRODUCTION TO CONSTRUCTION CLAIMS PREVENTION & MITIGATION

Claims prevention can be accomplished most effectively during the design phase of a construction project. When the design is sufficiently complete to enable qualified contractors to submit bids for the construction work, the careful preparation of well-considered contract documents offers the next greatest opportunity for claims prevention. Once contracts are executed and construction begins, the prevention of claims becomes more difficult, although the impact of claims can still be mitigated through timely management actions and effective contract administration. Figure 1, Project Transitions, shows how the responsibility for claims control is transferred over the life of the project from the planner to the designer and then to both the construction contractor and construction manager. (Please download the PDF article version to view Figure 1). The owner remains responsible, however, for claims prevention and mitigation activities during all phases of the project. The goal of this article is to identify solutions and suggest programs that you can use for construction claims mitigation and management. Topics include the following:

• Quality Contract Documents
• Management of Outside Design Professionals
• Constructibility and Biddability Reviews
• Site Investigation
• Review and Approval of Detailed As-Planned Schedules
• Claims Mitigation During Construction
• Project Reviews
• Contractor’s Risk Analysis
• Owner Guidelines

Also included are the following checklists:

• Site Investigation
• Contractor’s Project Review
• Contractor’s Risk Analysis

2.    QUALITY CONTRACT DOCUMENTS

The successful project manager is an effective manager of contracts. From the owner’s point of view, this involves three basic steps:

• Development of contract documents that provide a clear and nonconflicting basis for a contractor to assemble a bid. The contract documents must reflect the intent of the project in language that is unambiguous and provides a basis for a contractor to plan its means, methods, and sequences. Production of plans and specifications merely to satisfy owner goals of form and function is no longer the single objective.
• Contract administration has taken on new meaning. It is not merely the enforcement of the terms and conditions but includes the use of the terms and conditions to adapt to the changing environment, ongoing contract interpretation, and management of decisions necessary to keep the project moving forward. Both the contractor and the engineer have duties under the terms of the contract.
• Perhaps the most important step of construction claims avoidance—and the one most frequently overlooked—is the importance of record-keeping or documentation. Does the engineer have the hard facts to support decisions made during contract interpretations and to defend against unreasonable allegations on the part of the contractor expressed in the wording of a total cost claim. Without documentation, the engineer representing its owner is at the mercy of the courts.

The vast majority of claims are based on errors, omissions, conflicts, and ambiguities in the contract documents and/or erroneous interpretation of those documents. The engineer is in the middle of this process. No longer can claims be put off as an element to be resolved after the project is completed. The increasing exposure of the design professional makes it necessary for that design professional to take an active role in a claims prevention and mitigation program.

The design professional plays a major role in a claims prevention program prior to award of the construction contract. After all, the documents prepared by the design professional are more often than not used as the basis for a claim. Design professionals are not perfect. There will be errors, omissions and conflicts. The secret of a successful claims prevention and mitigation program is to minimize those errors and omissions and then to respond positively and reasonably when an error and/or omission is uncovered.

A construction claims prevention and mitigation review focuses on the principal causes of contractor claims. Value engineering and constructability reviews, on the other hand, focus on alternatives to reduce costs yet accomplish the same overall objectives. These alternatives typically involve means, methods, materials, form, equipment selection, etc. A claims prevention review focuses on potential errors, conflicts, omissions, ambiguities and misrepresentations both in terms of the contract documents and the system to administer, interpret, and manage those contracts.

It is important to recognize what is not included in a claims prevention review. A claims prevention review does not look at better or less expensive ways to accomplish the objective. It does not address the technical adequacy of the solution. It does attempt to find and recommend the elimination of potential causes of claims.

The following questions during the claims prevention review help to evaluate contract documents:

• Are the contract documents clear, complete and enforceable?
• Does the contract language use the common and normal meaning of words?
• Have the contract documents been reviewed to ensure conflicts do not exist between various sections?
• Do the contracts use exculpatory language inappropriately?
• Are the contract documents fair and reasonable?
• Do the contract documents allocate risks to the party best able to control those risks?
• Have the architectural and engineering disciplines taken sufficient precautions to ensure the design is reasonably free of errors?
• Do the contract documents adequately support the terms of payment selected, i.e., fixed price, cost-reimbursable, etc.?
• Are expectations clearly communicated?

3.    MANAGEMENT OF OUTSIDE DESIGN PROFESSIONALS

Studies have shown that over 60 percent of claims have their basis in defective and deficient contract documents. Owners often use the engineering services of engineering and construction companies and private design firms for preparation of these contract documents. Such professionals are not deemed to be perfect and do not warrant that their plans and specifications are 100 percent free of errors and omissions. Liability of design professionals for errors and omissions is beyond the scope of this particular course.

Common causes of problems that owners experience with professional contracts include the following:

• Incomplete scope of work
• Misunderstanding of work plan and the responsibilities of the parties
• Unclear performance criteria
• Interference and change by the owner
• No internal quality assurance system by professional designer
• Lack of independent reviews of professional work products
• Lack of coordination between subconsultants
• Inadequate selection procedure
• Lack of an agreed-upon schedule for professional performance
• Conflict between the professional as an agent and the professional as an independent contractor producing work products.

Of all of these causes, the most common problem is the failure in expectations between the parties. Professionals are contractors and must be managed by contract. This involves development of a scope of work, performance criteria, budgets and schedules – all of which form the basis for a meeting of the minds.

Much of the responsibility for the details of the scope of work should rest with the professional. Has the owner required that the professional submit a detailed work plan describing the who, what, where, when and how of the professional’s approach to meet the requirements of the owner? Is there an adequate procedure for professional selection that identifies the professional firm that is best qualified to perform the particular scope of work?

A selection process should contain as a minimum the following:

• Internal review of the scope of work to determine that it meets the requirements of all parties within the owner’s organization and adequately describes expectations.
• Requirements for a proposal format that includes: the approach to be taken, a work plan, personnel to work on the job, previous experience in similar work, references, and cost data as required by the owner.
• A formal review and selection process of an unbiased committee to screen written proposals and select three to five firms for oral interviews.
• Requirements that personnel who will actually work on the project present the orals rather than salesmen or marketing professionals.
• An independent committee that receives the oral presentations and makes recommendations to management for the award.
• If procedures allow, selection should be made on the basis of qualifications, personnel, technical competence, experience in similar work, etc. Negotiations can then be conducted with the top-rated firm to arrive at a price. If negotiations on price are not successful, then negotiations can move to the next rated firm on the best-qualified list. In any event, once the selection is made, the contract must be managed by the owner. Changes must be controlled and work products must be subject to scrutiny for independent review, preferably by those who will be responsible for its construction in the field, i.e., the resident engineer and the inspectors.

The role of the professional during construction should be specified. That role is usually limited to review of submittals, responses to requests for information and design clarifications, and occasional monitoring of work to determine that specific elements are being furnished and installed in accordance with the designer’s intent. Owners must be careful when placing the design professional in a position as an agent of the owner, making decisions concerning the professional’s work products. This occurs when the design professional is given construction management responsibilities. The concern here is the inherent liability for construction problems resulting from design issues and the objectivity of the design firm in dealing with such problems.

4.    CONSTRUCTIBILITY AND BIDDABILITY REVIEWS

We have discussed the importance of a review of plans for errors, omissions, and conflicts that would lead to a claim for defective construction documents. In addition, work products of the engineering department or design professionals can be subject to constructibility and biddability reviews utilizing the services of the resident engineers and inspectors or outside consultants who specialize in this business.

After an owner decides to build something, the three most important parties in this process of construction are the design professional, the resident engineer team, and the contractor. If these reviews are not performed, the contractor is often the innocent victim of a contract package that is deficient in terms of constructibility and biddability.

Is the contract package an adequate “basis for a bid”? Contractors have to be optimists. They have limited time to bid on projects and are competing with their fellow contractors in a tight market. The courts are sympathetic to this problem. If during the prosecution of a claim the contractor can present documentation showing how it put its bid together and show the assumptions made as to means, methods, and sequence, that documentation will have great weight as being the contemporaneous actions taken during a short bidding period based upon information available.

The basis for bid must not only be clear as to design intent, but also be a clear basis for constructibility and biddability. Resident engineers and inspectors can provide a great service at this point by addressing the following:

• Specifications and divisions are appropriate and per a standard format.
• Procedures for substitutions are clear.
• Appropriate material and equipment standards are specified.
• No sole source or brand name materials or equipment are specified.
• Technologies and notations are consistent.
• Plans and specifications allow a broad selection of appropriate construction means, methods, and techniques.
• Cross-reference of drawings and specifications are complete.
• Complete description is provided of anything to be furnished by the owner with a schedule of delivery.
• Definition of items of work to be provided by each contractor for multiple contracts is provided.
• Definition of quality control responsibilities of the contractor and owner is provided, with a clear statement of tests and access required.
• Submittal requirements are clear.
• Review period for submittals is identified and appropriate.
• The construction schedule is feasible and clearly defined with schedule interface points identified.
• Completion times are specified.
• Supplemental data is referenced.
• Disposal requirements for excess material waste cleanup are identified.
• Divisions of work are clearly identified at contractor interfaces.
• Drawings are sufficiently detailed and work is clearly defined.
• Structure of the bid form, bid schedule, etc., is clearly defined and unambiguous.
• Proper units are used for bid items.
• Bid items are clear as to the scope that they cover.
• Bid quantities are reasonable for the work scope defined.
• Bid items are coordinated with drawings and specifications.
• Measurement and payment mechanisms are clearly defined and reasonably coordinated with bid items.
• Change order procedure is spelled out and the basis for adjustment is identified.

5.    SITE INVESTIGATION

A thorough site investigation by the contractor is essential to ensure all site-specific information is collected for preparation of the bid estimate. If the contractor fails to perform an adequate site investigation, many of the impacts that may affect the contractor’s time and cost of performance may not be recognized. If such conditions would normally be identified and recognized by a prudent and experienced contractor through a site investigation, recovery from unanticipated costs caused by these impacts would normally be precluded.

A thorough site investigation would include the following categories of information:

• General site information, i.e., soil conditions, utilities, subsurface conditions
• Detailed surface conditions
• Detailed subsurface conditions
• Permits, fees, and tax requirements
• Material staging and site logistics
• Labor information
• Weather data
• Equipment and materials information
• Transportation information
• Pricing data
• Notes of meetings with owner’s site representatives

An example of a Site Investigation Checklist is shown as Table 1. (Please download the PDF article version to view Table 1).

6.    REVIEW AND APPROVAL OF DETAILED AS-PLANNED SCHEDULES

Creating a detailed as-planned schedule that identifies the scope of the work, the activity relationships, milestones and completion requirements is vital to the proper planning of a project. A contractor should perform the following tasks to review and check its as‑planned schedules, ensure their completeness, accuracy, and reasonableness, and allow for their timely approval by the owner:

• Verify that all work that must be performed is included in the schedule.
• Check the level of detail proposed. Is it consistent and balanced throughout the network or is it vague in certain areas? Is the level of detail adequate to plan, schedule, coordinate, monitor, control, and report on the progress of work?
• Check for compliance with all contract specifications related to the schedule.
• Check to ensure that all owner-related functions outlined in the contract documents are properly incorporated. These include:
  • Access and availability dates for physical areas of the project
  • Intermediate completion dates established for follow-on contractors
  • Delivery of owner-furnished materials and equipment
  • Approval of shop drawings, submittals, and samples
  • Inspections as required
  • Joint occupancy dates
  • Beneficial occupancy dates
• Check the project milestones and constraints established in the network and identify if they are contractual, absolute, or preferential.
• Check if restraints in the schedule logic create incorrect critical paths.
• Evaluate past experience relative to this type of project. Spot-check relationships or work phases and their timing, i.e., structural steel erected to job completion, setting of major equipment to job completion, etc.
• When comparing the schedule for a similar job, are necessary activities included, are durations correct, and does the project duration fall within a reasonable variation range?
• Perform a one-to-one data check to validate the consistency of the computer tabulation and the network logic if a CPM is used.
• Are the size and type of operation for each activity period clearly defined?
• Are the activities sufficiently small in duration and scope for accurate time estimation and tracking?
• Are the activity durations reasonable?
• Are concurrent activities so scheduled?
• Review the proposed logic sequence and note any exceptions that might be taken. Validate absolute logic conditions and confirm key preferential logic conditions.
• Spot-check activity durations for quantities involved, crew-size requirements, and productivity factors. Challenge durations when appropriate.
• Is it possible to complete each activity described in the allocated time, given the resources available?
• Highlight the first five to seven paths of criticality (paths of least float) to review and understand the controlling logic and mathematics of the schedule. Determine if the critical path is proper and reasonable.
• Check the plan to see if all major equipment and material restraints and delivery dates are properly reflected.
• Is the lead time for submittals and approvals realistic?
• Check for involvement of subcontractors and suppliers and see if they are properly reflected. Are dependencies clearly defined? Any critical deliveries?
• How is weather reflected? Are there any seasonal weather restrictions to consider?
• Prior to submitting a detailed as-planned schedule for the owner’s approval, obtain approvals from internal management team including:
  • Project Manager
  • Project Controls Manager
  • Operations Manager

7.    CLAIMS MITIGATION DURING CONSTRUCTION

Successful construction claims mitigation results from prudent management activities. The following activities during the construction phase of a project are essential for both the owner’s team and the contractor’s team to mitigate claims and ensure the overall success of the project:

• Read and understand the contract documents.
• Implement a document control system to capture, code and file documents.
• Hold pre-construction meetings and reach agreements on key project objectives.
• Prioritize the relative importance of each objective.
• Define clearly the roles and responsibilities of each party.
• Allocate risks to the party best able to control those risks and provide equitable rewards for assuming risks.
• Develop performance criteria to communicate expectations and to measure each party’s achievements.
• Coordinate activities involving several parties.
• Implement cost, schedule and quality control procedures.
• Hold periodic progress reviews and inspections.
• Maintain open communications throughout the project.

Commonly, a contractor’s Change Order procedure may not require identification of delays to specific schedule activities and the completion date as part of the evaluation of the changed work. Schedule fragnets showing these time impacts to existing activities and the inclusion for new activities should be required as part of the Change Order procedure. In addition, the change estimate should specifically address the cost of potential delay and productivity loss cost impacts on other work as part of the change order estimate. If these estimates are not practical, the contractor should specifically reserve its rights to request additional compensation for delay and impact costs associated with change orders as part of the approval process.

Relative to a contractor’s Scheduling Procedure, we suggest that, in addition to identifying the variances in durations and lag relationships when performing schedule updates for monthly reviews, the contractor’s project personnel should also be required to identify the cause and responsibility for these delays as part of the schedule report for internal management review only. Causes of delay that are the owner’s responsibility should be included in the contractor’s progress reports to the owner.

Relative to Cost Control Procedures, the contractor should track the man-hours and costs of changed work in the field. This is particularly important on lump sum projects where there may be disagreement as to the costs and impacts of changed work. Separate cost codes and tracking systems should be implemented to capture these increased costs. The contractor’s procedure should also ensure that the level of detail in its base contract work is sufficient to capture any impact costs to base work caused by changed work. For example, if the contractor is only capturing the costs of piping in one cost code, and multiple changes start occurring to the piping systems, the contractor should consider expanding the piping cost codes to an area or system basis to ensure that cost impacts can be tracked.

All parties have obligations and duties under their contracts. Principal duties of the engineer acting as an agent of the owner are to make decisions and to interpret the contract when required. Under the principle of implied warranty, the engineer acting as an agent for the owner has a responsibility to affirmatively cooperate to keep the project moving. This cooperation often requires decisions in the following areas:

• Scope of work
• Clarifications
• Alleged errors and omissions
• Differing site conditions
• Submittals
• Or-equal requests
• Questions of quality and performance
• Schedule administration
• Requests for time extension
• Changes
• Questions of progress and early completion
• Third-party coordination
• Payment

On traditional construction projects involving an owner, design professional, and construction contractor, there exist overlapping responsibilities for decisions regarding the areas listed above, as shown in Figure 2. On design-build projects, the design professional and construction contractor functions become the responsibility of one organization. As a result, design clarifications and the resolution of errors and omissions become problems that are resolved internally by the design-build contractor, as shown in Figure 3. (Please download the PDF article version to view Figures 2 and 3).

Under either a traditional or design-build organizational structure, a decision management matrix should be implemented to clearly define who has review and/ or approval responsibility for the various decision points during the project. Written procedures and assignment of responsibilities should be made for each area of overlapping responsibility. For example, the resident engineer should avoid the trap of becoming a historical scribe merely recording submittals as they are received. Under a decision management system, an individual should be designated to review the submittal file and to follow up on those submittals that have been in review longer than ten days.

Timely response is an essential element of a claims mitigation program. The engineer who takes timely and positive action is looked upon by the courts with favor as opposed to one who merely records data for historical purposes and stonewalls legitimate questions of interpretation or clarification.

Finally, a formal system of dispute resolution procedures should be developed which encourages settlements. The goal of the parties should be to resolve disputes before they turn into a claim leading to arbitration or litigation. Figure 4, Claim Resolution Process, presents an example of a formal dispute resolution procedure. (Please download the PDF article version to view Figure 4).

8.    PROJECT REVIEWS

During the execution of a project, it is prudent for a contractor’s senior management team to conduct periodic reviews of project performance to ensure that problems are being properly resolved, man-hour, cost and schedule information are being properly reported and analyzed to assure performance criteria are being met, changes are being properly estimated and sent to the owner for approval in a timely manner, comprehensive project documentation is being maintained, schedules are being updated and delays are being identified as to causes and responsibilities, and notices are being sent to the owner as required per the contract. In addition, major problems that should be brought to the attention of the owner at a higher level than the contractor’s Project Manager should be dealt with immediately to mitigate or resolve significant issues.

A detailed Project Review Checklist is attached as Table 2 (Please download the PDF article version to view Table 2). This checklist contains a lengthy list of questions that a senior level project review team should use to ensure that all issues regarding the status of the project are covered during project reviews.

9.    CONTRACTOR’S RISK ANALYSIS

The best way for a construction contractor to prevent disasters and claims on a project is to thoroughly evaluate, before the job is bid, the risks involved in performing the project and implement necessary and effective mitigation measures in its management of the project to control these risks.

A Risk Analysis Checklist is provided as Table 3 (Please download the PDF article version to view Table 3). This checklist includes the following major categories of issues:

• Pre-Contract/Performance Issues
• State Lien Law Requirements
• Bond Requirements
• Critical Contract Clauses
• Notice Requirements
• Scheduling Requirements
• Change Order Procedures
• Payment Provisions
• Disputes Procedure
• Federal Government Contracts

10.    OWNER GUIDELINES

Unquestionably, the best way to handle a dispute is to prevent it altogether. The next best way is to settle it when it arises. The parties involved in any construction project frequently have conflicting interests; however, they have one common goal – completion of the project.

The following is a list of recommendations to owners for avoiding disputes:

• Do not rush design. Give the engineering firm and design professionals adequate time to complete, check and coordinate the design, drawings and specifications. If the contractor performs the checking or coordination, the cost will invariably be greater.
• Do not rush preparation of the plans and specifications. A complete set of plans and specifications with adequate details defining the scope of the project reduces the chance of disputes and extra work claims.
• Create a set of plans and specifications tailored and detailed to the particular project. “Off-the-shelf” specifications can create ambiguity, conflict and claims.
• Perform sufficient subsurface exploration to inform the bidders of the conditions of the proposed work. If you do not, you will pay a premium if ground conditions are better than expected or you will face a claim if the contractor encounters a “differing site condition.” A good pre-contract site investigation and subsurface exploration are fundamental to the avoidance of disputes.
• The Field Engineer must know the requirements of the contract. The contractor will prosecute the work according to its plan. The Field Engineer must know what is planned as to quality, quantity, method, sequence, technique and procedure. A knowledgeable Field Engineer can catch faulty work or materials before they generate failures and extra costs. A good, honest, objective inspection helps the contractor and the owner.
• Communicate. Do not make the relationship with the contractor an adversarial one. Promote a cooperative attitude and interpret the contract equitably. Do not try to force the contractor to provide more than what is set out in the contract. However, if the contractor submits a change order or claim, the owner may need to request more information to adequately evaluate the merits of the contractor’s request.
• Be timely. If a contractor requests information, design clarification, approvals of submittals or shop drawings, act with due dispatch to support the construction. Lack of timely response is a frequent source of disputes and claims.
• Be event oriented. Address problems when they arise. Work out solutions rather than concentrating on pointing fingers. No problem is the contractor’s problem alone. If it impacts the project, it is your problem, too. Try to contemporaneously resolve extra work situations.
• Assist the contractor. Do not direct the contractor. You are there to help. The contractor though must build the project. You are not there to manage the work. If you do, you become responsible for any delay or disruption to the contractor’s plan.
• Document the job. Document the job. Document the job. You are the eyes and ears on the project. You must contemporaneously record the job history. Without your written words, there is not opportunity to evaluate job events. Provide sufficient information of what occurs on the job everyday so someone unfamiliar with the job can become fully familiar by reading your reports and diary.

Hopefully, these recommendations will help to avoid disputes, but also they should allow for a smoother project, better cooperation between engineer and contractor, and better and easier resolution of claims.

Learn more about Long International’s claim prevention services here.

About the Author

Richard J. Long, P.E., P.Eng., is Founder of Long International, Inc. Mr. Long has over 50 years of U.S. and international engineering, construction, and management consulting experience involving construction contract disputes analysis and resolution, arbitration and litigation support and expert testimony, project management, engineering and construction management, cost and schedule control, and process engineering. As an internationally recognized expert in the analysis and resolution of complex construction disputes for over 35 years, Mr. Long has served as the lead expert on over 300 projects having claims ranging in size from US$100,000 to over US$2 billion. He has presented and published numerous articles on the subjects of claims analysis, entitlement issues, CPM schedule and damages analyses, and claims prevention. Mr. Long earned a B.S. in Chemical Engineering from the University of Pittsburgh in 1970 and an M.S. in Chemical and Petroleum Refining Engineering from the Colorado School of Mines in 1974. Mr. Long is based in Littleton, Colorado and can be contacted at rlong@long-intl.com and (303) 972-2443.

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